Definition
Beta measures how much a stock or portfolio moves relative to the market. A beta of 1.0 moves in line with the market. Above 1.0 amplifies market moves (more volatile); below 1.0 dampens them. Beta is central to CAPM and determines the required return for bearing market risk. It only captures systematic (non-diversifiable) risk.
functions Formula
β = Cov(Rᵢ, Rm) / Var(Rm)
lightbulb Example
A tech stock has beta of 1.5. If the market rises 10%, the stock is expected to rise 15%. If the market falls 10%, expected decline is 15%. A utility stock with beta 0.6 would only move 6% in either direction.
verified_user Key Points
- Beta = 1.0 moves with market
- Beta > 1.0 amplifies market moves
- Beta < 1.0 dampens market moves
- Only captures systematic (market) risk